Dynamic supply chain design: Square root law for bullwhip

Proceedings of the International Symposium on Logistics, 9th-12th July, Beijing, CHINA.

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Abstract

We present a methodology to dynamically design supply chain networks taking into account both inventory and capacity (bullwhip) related costs. We assume i.i.d. demand and the order-up-to policy is used to place replenishment orders with a lead-time of one period. Our methodology is complete, analytical and exact. We illustrate its application via a toy numerical example that seems to suggest that a ‘square root law for bullwhip costs’ exists. We provide a sketch of a proof that shows this is indeed the case.